US Federal Reserve likely to raise rates: NAB

The US Federal Reserve looks set to raise the funds rate to a target rate of 0.75 to 1.00 per cent at its meeting this month, according to NAB Group Economics.

Federal Reserve chair Janet Yellen said last week that if employment and inflation continue to evolve in line with the reserve’s expectations that “a further adjustment of the federal funds rate would likely be appropriate” at the meeting on 14-15 March.

“Our individual projections for the appropriate path for the federal funds rate reflect economic forecasts that generally envision that economic activity will expand at a moderate pace in coming years, labor market conditions will strengthen somewhat further and inflation will be at or near 2 per cent over the medium term,” she said.

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“In short, we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect.”

NAB Group Economics said it appeared that “this bar has been met” despite weakness in the hard data used to estimate the country’s GDP for the first quarter.

“Weakness in first quarter GDP has not been unusual in recent years and surveys of business and consumers show a solid underlying economy,” the group said.

“The main risk to a Fed hike in March is Friday’s employment report. However, it would have to be very weak to change Fed views. The Fed is used to seeing a degree of volatility in the data and won’t be put off by a soft report particularly as other indicators of the labour market are running strong.”

Fixed income research platform BondAdviser said that while the employment report did still pose a risk, interest rate futures markets are indicating a hike is still very likely.

“Interest rate futures markets are now pricing in a 94 per cent probability of a US rate hike at the Federal Reserve’s March meeting,” the company said.

“The US jobs report this Friday is the only obstacle standing in the way with the Federal Reserve effectively in blackout zone until then, which limits the extent to which Federal Open Market Committee participants and staff can speak publicly.”